Accounting Equation - What is it and how to calculate it.

What is the Accounting Equation

The basic accounting equation summarizes the nature of the double entry accounting system. The financial statements would not balance if the accounting equation does not balance.

In this equation there must always be a debit for every credit and vice versa. There is always a corresponding entry for the one being made which balances it out on both sides of the equation. It is this system that promotes the tracking of transactions so that auditors can understand the accounting equation the outcomes.

What is the accounting equation formula

The accounting equation formula is:

Assets = Liabilities + Owners Equity

or A=L+OE

What is another way of looking at the accounting balance sheet equation

Where total debits, equal total credits D=C

What are debits

Debits are the positive balances in the accounts. They can include capital assets and expenses.

What are credits

Credits have negative balances in the accounts. They can include liabilities and income.

Which are examples of revenue expenses

Revenue expenses are those expenses incurred in the running of the normal business activity. Revenue expenses can include:

• rent expenses
• salary expenses
• insurance expenses
• commission expenses
• manufacturing expenses

What is retained earnings

These are the historic profits of the company that have not yet been allocated or distributed.

What is accounts receivables

These are sales of goods and services that have been delivered but not yet paid for. The customer in effect owes the company until that payment flows through the books. They are also referred to as trade debtors.

What is included in total assets

It includes all the resources in the possession of the owner and can include cash, physical assets, tangible assets, land and buildings and trade receivables.

What is included in total liabilities

These are any debts or obligations that a company might have with another party. Example of total liabilities are:

• accounts payable
• trade creditors
• pension obligations
• bonds
• income tax liabilities
• contingent liabilities
• tax payable i.e. sales tax, vat, Paye

What is the difference between a debit and credit

A debit is either an asset or expense to a company whereas a credit is a liability or income.

What are Assets Liabilities Equities

• Assets = land and buildings, cash on hand, physical and intangible assets, trade receivables investments, loans receivable
• Liabilities = bonds, hire purchase agreements, trade payables, loans payable,
• Equities =this is the value left when deducting all liabilities from total assets

What is the important or purpose of the double entry bookkeeping system

The system always ensures that everything adds up i.e. assets = liabilities.

Accounting Equation Examples:

Example 1:

You buy pens for your office and spend R500 CASH. The accounting system records this as:

Debit - Printing and stationery R500

Credit - Bank R500

Example 2:

You buy pens for your office and spend R500 CREDIT. The accounting system records this as:

Debit - Expenses (Printing and stationery expense) R500

Credit - Supplier account R500

Example 3:

You buy office furniture and spend R6500 on CREDIT. The accounting system records this as:

Debit - Assets (Office furniture) R6500

Credit - Supplier/Loan account R6500

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